Expenses and income needs in retirement

There are two broad types of expenses that you will need to cover in retirement: basic needs and discretionary needs.

Basic needs

Basic needs are your necessities—ongoing, non-discretionary expenses like food, shelter, transportation, health care, and other essentials. You should look to cover these expenses first through guaranteed sources of income, such as Social Security, pensions, and annuities.

Discretionary needs

The retirement lifestyle you choose may include activities that are important to you, but not essential such as travel or entertainment. Your guaranteed income sources may not be sufficient to pay for your basic needs and discretionary expenses. Plan on paying for these discretionary expenses with non-guaranteed sources of income so that adjustments can be made to your budget as fluctuations occur.

Retirement expenses vary with age

Younger retirees generally spend more on discretionary items, such as travel and entertainment, than older retirees. In fact, early retirees tend to spend the same level of money they were living on right before they retired, if not more. As retirees age, nondiscretionary expenses take a larger portion of income. One reason is because health care costs can increase significantly over time.

How much income will you need?

An often-cited estimate is that you will need about 80% of your pre-retirement annual income for a comfortable retirement. However, depending on your personal lifestyle, you may need more or less. Some retirees might be able to get by on 70% of their pre-retirement income, while others might spend well over 100%.

To help you determine how much income you will need, consider how your plans for retirement will impact your spending. For example, do you anticipate spending more or less in each of the categories below?

Mortgage or rent payments

Interest payments on other debt

Travel

Major purchases

Entertainment and recreational activities

Out-of-pocket costs for medical care and medical insurance

Charitable giving

Taxes

While the level of spending in each can have different impacts, if you marked most of these as “more,” you should consider to plan for retirement income at or greater than your pre-retirement income. Conversely, if you marked many as “less” or the same, then you might be able to live on 80-90% of your pre-retirement income.

Planning your retirement income requires balancing the risk of drawing down your income too quickly and being left with little to live on in your 80s or 90s, and the opposite scenario of spending your income too slowly and needlessly crimping your retirement standard of living. Consider talking to a financial professional who can help you develop a written plan for your retirement income.

Saving enough for retirement?

Find out with My Retirement Plan, an online tool that makes it easy to see if you are on track. After you answer a few questions, My Retirement Plan will calculate your retirement savings goal and recommend personalized next steps.

Products to Consider

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